“A
FIVE per cent per annum rate of increase in real national income seems
entirely feasible on the basis of both the experience of other countries
and of India’s own recent past. The great untapped resource of technical
and scientific knowledge available to India for the taking is the economic
equivalent of the untapped continent available to the United States 150
years ago.” If these opening words in a memorandum addressed to the
government of India do not impress you, think again: the date on the
memorandum is November 5, 1955 and its author is Milton Friedman, the 1976
Nobel Laureate in Economics.

Friedman
visited the ministry of finance briefly during 1955 and wrote the
memorandum at the invitation of the government of India. Less than 5,000
words long, today the contents of this memorandum have become standard
thinking among reform-minded economists in India. But at the time it was
written, it must have been nothing less than heresy. It certainly did not
see light of the day for 37 years until it was published in a volume
edited by Subroto Roy and William E James.

In
the memorandum, Friedman focuses on the policies that had just been
adopted or were being considered for adoption and were contrary to the
goal of development in his view. He begins by questioning the reliance on
the ratio of investment to national income as almost the only key to
development. He argues that the form and distribution of investment are at
least as important as its sheer magnitude. Moreover, what is called
capital investment is only part of the expenditure on increasing the
economy’s productive capacity. Expenditures on increasing the productive
capacity of human beings matter at least as much.

Friedman
goes on to criticise the emphasis in India’s investment policy on the
development of two extremes: heavy industry and “handicrafts”. “This
policy threatens an inefficient use of capital by combining it with too
little labour at one extreme and an inefficient use of labour by combining
it with too little capital at the other extreme.” Instead, he advocates
a diversified and much expanded light industry as the foundation on which
to build the heavy industry.

Friedman
warns against reliance on public sector for activities that can be
performed by private sector. He cites the disappointing outcome of the
flirtation with this sector by European countries in the immediate
post-war period and reminds of the drastic change this experience had
produced in the attitudes of labour and left wing towards state control
over economic activity. “The elements in the parties that have not
changed the approach are now being dubbed ‘reactionary’ by some of
their fellows!” He warns that in India, the areas for which only
government can take responsibility are so large that they alone would be a
heavy burden on the limited administrative personnel of high calibre.
“It seems the better part of wisdom therefore to avoid any activities
that can be left to others.”

Friedman
also fully anticipates the pitfalls of rigid and detailed controls on
investment. “It is impossible to predict in advance the lines of
investment that will turn out to be the most productive — as the failure
of so many private enterprises amply demonstrates. There is therefore
great need for a system that is flexible and can change easily.” He also
criticises detailed direction on the ground that it wastes scarce energies
and abilities of public servants in producing and enforcing regulations
and of private individuals in trying to evade or change them.

Friedman
comes down heavily on protection that promotes inefficiency irrespective
of whether it applies to small enterprises or large concerns. Referring to
the favours granted to small enterprises to promote employment, he writes,
“The objective is fundamental, and would be worth achieving even at some
cost in total output, but it seems to the present writer dubious that
these means accomplish their objective even in the short run, and is
certain that they work against it in the moderate or long run.”

Turning
then to large scale firms, he writes, “Granting them special favour in
the form of especially advantageous loans, guaranteed markets, refusal of
licenses to competitors, enforcing or even permitting private price-fixing
and market-sharing agreements simply encourages inefficiency and wastes
scarce resources. If private industry is granted special favours by the
government, it is certainly inevitable that its use of these favours will
be controlled; but this does not offset the harm done by the favours; it
merely introduces new sources of rigidity and inefficiency.”

Friedman
is highly critical of the erratic monetary policy at the time and
advocates a steady expansion of money stock at the annual rate of 4 to 6
per cent. He also warns against the wisdom of foreign-exchange controls.
“They introduce delay, uncertainty, and arbitrariness into domestic
business activities. The criteria the officials use — and must use —
tend to perpetuate the status quo ante, and therefore constitute an
obstacle to dynamic change and adaptation in an area that traditionally
has been one of the most dynamic sectors.” He advocates either a move to
flexible exchange rates or, less desirably, auctioning of foreign exchange
to the highest bidder.

What
does the master himself think of the memorandum today? In a note to
Subroto Roy, dated 14 September 1998, he writes, “I am sure that if I
were writing it today, it would differ in many details and recognise the
many changes that have occurred in the past 43 years. Yet I believe the
general thrust would be the same. More important, I believe that the
experience of those years around the world has led to far greater support
for free markets, minimum government intervention, and floating exchange
rates than existed then.”